What To Expect From The Markets This Week - 060720

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Nigeria: Economic Dashboard @ 030720  


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Editor's Pick 

Source:  Cordros Weekly Economic and Market Report - July 03, 2020

 

Global Economy 

China's factory activity expanded at a faster pace in June, beating consensus expectations, as the economy continues to recover after the government lifted strict lockdowns and ramped up investment. The official manufacturing Purchasing Manager's Index (PMI) rose to a three-month high of 50.9 in June from 50.6 in May, while the non-manufacturing PMI increased to 54.4 in June from 53.6 the previous month. The improvement indicates that more robust local demand predominantly boosted sales in the review period. However, new export orders (42.6) continued to fall, confirming that external demand remains weak. The divergence of the domestic recovery and export orders contraction highlights that the Chinese economy remains affected by the global pandemic. As new cases continue to grow globally, we believe China will continue to face a contraction in export orders in the coming months.

Unemployment in the Euro Area edged up only slightly and by less than expected in May as lockdowns gradually eased. The seasonally adjusted rate increased to 7.4% in May, from 7.3% in April, as the latest governments' efforts to support jobs and activity have been supporting the labour market in recent months, as well as an increase in the number of inactive people due to the coronavirus crisis. We note that the rise is extremely mild compared to the severity of the economic decline as the vast number of people on short-time work at the moment is suppressing the actual number of unemployed significantly. The surprisingly stable unemployment rate is likely to continue to creep up since economic output is unlikely to reach pre-crisis levels anytime soon, leading to inevitable job losses especially when short-time work schemes draw to a close.


 

Global Markets

Global equities markets were broadly positive amidst encouraging news related to the development of a potential coronavirus vaccine and as economic data continued to surprise to the upside. US (DJIA: +3.2%; S&P: +4.0%) stocks received an early boost from positive homes sales data and concluded the best quarter for equities in more than two decades in the holiday-shortened week. European (STOXX Europe: +2.9%; FTSE 100: +1.3%) stocks also gained as a series of strong data pointed to a global economic recovery. Asian markets were mixed with Japanese (Nikkei 225: -0.9%) stocks ending the week lower as subsequent gains were not enough to offset Monday's significant loss. However, Chinese (SSE: +5.8%) shares rallied to their highest level since April 2019 as positive manufacturing data lifted sentiments. Emerging markets (MSCI EM: +2.5%) stocks were set to close higher, also on upbeat data from China and the US. In contrast, frontier markets (MSCI FM: -0.3%) equities were set to close marginally lower following continued profit-taking in Kuwait (-1.0%) and Vietnam (-0.5%).


Nigeria

 

 Economy

As with the prior month, Nigeria's composite PMI remained in contractionary territory, printing 38.4 index points in June - this is according to the monthly survey conducted by the CBN. However, compared to a month ago, the change in the pace of activities (+4.6 points) was stronger. The disappointing outturn was a fall out from the impact of the COVID-19 outbreak on economic activities. Non-manufacturing activity was the worst hit as the index contracted to 35.7 points. All subcomponents contracted, with the level of inventory reporting the largest contraction (32.5). As COVID-19 continues to spread fast across the country, we foresee further headwinds. While the Q1-20 GDP growth outturn was surprisingly positive, it's difficult to argue against an economic recession this year should the outbreak persist for an extended period.

Elsewhere, the PPPRA, in its mandate to phase out the petrol subsidy regime, has raised the PMS pump price band from NGN121.5 - NGN123.5/litre to NGN140.8 - NGN143.8/litre for July 2020. We recall that the outbreak of COVID-19, which preceded the collapse in oil prices, forced the FGN to bow to the pressure of restructuring the downstream sector via the removal of fuel subsidy. While we like that the FGN is keeping to its promise by tweaking pump prices due to changes in fundamentals, we still see some form of implicit subsidy payments (c. NGN6.16/litre) solely on exchange rates alone. The PPPRA applies an official exchange of NGN360/USD in its price modulation. Using the IEW rate of NGN386.00/USD and the parallel rate of NGN460.00/USD, PMS should be retailing at between NGN149.96/litre and NGN173.52/litre, respectively. The preceding is based on a Platts Gasoline price of USD1.49/gal.



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Capital Markets

 

Equities

Nigerian stocks suffered another week of losses on rising COVID-19 cases in the country and the persisting FX illiquidity in the market. The ASI declined by 2.0% w/w, led by selloffs in BUACEMENT (-2.3%), MTNN (-1.3%), UNILEVER (-18.8%) and the banking stocks. Accordingly, the Month-to-Date and Year-to-Date losses printed -0.6% and -9.3%, respectively. Sectoral performances were negative, with the Banking (-7.5%), Industrial Goods (-6.4%), Insurance (-2.2%), Oil & Gas (-1.2%) and Consumer Goods (-0.5%) indices on recording weekly losses.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.


Fixed Income and Money Market 


Money Market

The overnight (OVN) rate jumped by 740bps w/w, to 23.5% as outflows from CRR and OMO auction (NGN100.00 billion) debits outweighed the inflows from OMO maturities (NGN333.31 billion) and retail FX refunds.

In the coming week, we expect a modest contraction in the OVN, with system liquidity receiving a slight boost from OMO maturities (NGN16.00 billion).


 

Treasury Bills

In the Treasury bills secondary market, trading remained at moderate levels following pressured system liquidity, low rates and shift in focus to the primary markets of both segments. Nonetheless, the average yield across all instruments pared by 2bps to 4.2%. Across the segments, average yield expanded by 14bps to 5.2% at the OMO segment as activity in the space remained frail; yields contracted by 15bps to 2.1%, on average, at the NTB segment, as market participants covered for lost bids at the PMA. At the PMA, demand remained heavy, as there was an oversubscription of 3.7x for the NGN88.86 billion worth of bills on offer. The auction closed with the CBN rolling over NGN10.00 billion of the 91-day, NGN20.00 billion of the 182-day and NGN58.86 billion of the 364-day - at respective stop rates of 1.79% (previously 1.80%), 1.91% (previously 2.04%), and 3.39% (previously 3.75%). At the OMO auction, stop rates were unchanged as the CBN mopped up NGN100.00 billion of maturating bills across all tenors.

We expect demand for T-bills to remain at current levels amidst tight system liquidity and low yields




Bond

Trading in the Treasury bonds secondary market ended the week on a bullish note due to particular interest in instruments at the head and belly of the curve. This is as investors looked to reinvest OMO maturities and lost bids at the NTB auction. Thus, average yield across instruments contracted by 69bps to 8.1%. Across the curve, yields contracted at the short (-69bps), mid (-128bps) and long (-30bps) segments following demand for the JAN-2026 (-133bps), JUL-2030 (-203bps) and JUL-2034 (-53bps) bonds, respectively.

We expect the Treasury bonds secondary market to remain bullish due to the relatively attractive yields in the space.


Foreign Exchange

For the fifth straight week, the CBN's foreign reserves declined as FX outflows outpaced inflows. Specifically, the foreign reserves dipped by USD52.10 million w/w to USD36.16 billion. Consequently, the naira strengthened against the US dollar by 0.09% WTD to NGN386.00/USD at the I&E window, while it weakened by 0.22% to NGN461.00/USD at the parallel market. In the forwards market, the naira appreciated against the US dollar across all contracts. Pointedly, the 1-month (+0.2% to NGN387.31/USD), 3-month (+0.3% to NGN390.33/USD), 6-month (+0.5% to NGN394.66/USD) and 1-year (+0.8% to NGN410.56/USD) contracts, all gained ground against the USD in the review period. Elsewhere, the CBN increased the bid price for FX at its Secondary Market Intervention Sales (SMIS) window by 5.6% to NGN380.00/USD. This we regard, is in line with the apex bank's intention to unify the exchange rate towards the NAFEX rate.

For us, the widening current account (CA) position suggests that odds are stacked against the naira. Beyond that, as the economy gradually reopens, the resumption of FX sales to the BDC segment of the market will place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.



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